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THE DEVELOPMENT CHALLENGE AND SOME ASIA LESSONS FOR SUB SAHARAN AFRICA

By Kristen Pierce,2014-06-18 01:04
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THE DEVELOPMENT CHALLENGE AND SOME ASIA LESSONS FOR SUB SAHARAN AFRICA

The Development Challenge and Some Asian

    Lessons for Sub-Saharan Africa

     1Geoffrey A. Onegi-Obel

Introduction

One cannot avoid a discussion of public policy and public choice in an

    examination of Asian lessons for the challenges of aid and development in

    Africa. However, public policy and public choice are stand-alone subjects

    requiring much analytical space, so the discussion here must necessarily be

    limited.

This particular discussion is therefore divided into two broad parts an

    introductory part covering a limited discussion of the context and some

    individual and institutional stakeholders in Asia and Africa who can provide

    lessons for comparison.

This is followed with a brief example of how what passes for public policy and

    public choice can affect the development of key infrastructure in an economy,

    which is illustrated with the example of the protracted development of

    Uganda Securities Exchange Ltd (USE) Uganda’s eight-year-old stock

    exchange.

The last and most important part of the discussion presents some carefully

    selected comparative lessons from Asia concerning what Africa must do in

    order to improve the lives of its peoples.

The Context and the Stakeholders: Public Choice and Public Policy in

    Africa

There is no better context for a comparison of Asia and Africa lessons on aid

    than the overwhelming scope and spirit of the Blair Commission

    recommendations. The commission has triggered a doubling of G8 aid by

    2010, US$25 billion of which is earmarked for Africa. The European Union

    has also pledged a further US$40 million by the same date this in addition

    to over US$55 million in debt cancellations.

     1 DR OBEL is Chairman, Uganda Securities Exchange and Senior Presidential Advisor (AGOA & Trade),

    Uganda. E-mail: pacego2000@yahoo.com. This paper was prepared for the conference on ‘Africa beyond Aid’ co-hosted by The Brenthurst Foundation, DANIDA and the Konrad Adenauer Stiftung, Germany, 34

    April 2006.

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    Some stakeholders have been outstanding in their contributions on the subject of aid. For example, the influential Professor Jeffrey Sachs, using the UN as a platform, has thrown his hat into the ring of the growing constituency of advocates for more aid for Africa. Sachs has a persuasive argument, correctly identifying the key variables of household savings and public investment as key in the challenge of moving up the ‘ladder of

    development’.

    However, the argument is flawed in its premise that there can be no useful household savings and public investment in a US$300 per capita income regime.

    The aid industry is clearly looking up, its future more or less guaranteed up to 2010. After the five previous failed ‘development decades’, this magic

    period up to 2010 will no doubt become known as the Blair Commission decade of aid.

However, the scope and spirit of the Blair Commission Report has also

    brought to the surface hitherto underground but intense concerns by African stakeholders (both leaders and members of ordinary households) regarding the process of aid.

The premise of aid as the key component of any policy framework for Africa’s

    growth and development is under serious challenge. It is no longer satisfactory to state that Africa is a failure because of governance, wars, disease and its democracy deficit. Botswana and Namibia have, for example, in many ways a ‘democracy surplus’, but are nowhere near becoming ‘African Tigers’.

    Africans outside the aid infrastructure (tax-paying businesspeople, well-educated jobless parents with equally well-educated but children) have watched as Asia, with progressively declining aid inflows, has pushed domestic savings rates as a percentage of gross domestic product (GDP) beyond the magic 20% and well into the 35% range.

    Africans have also watched as the Asian savings pool has domesticated foreign direct investment (FDI) inflows and redirected such inflows towards the preferred portfolio FDI, while in Africa, non-portfolio FDI has continued to dominate.

    Africans have observed with dismay as five decades of aid has generated high-risk, high-interest-rate regimes in shallow financial sub-sectors that have crowded out tax-paying business and constrained GDP expansion that could create jobs.

    The aid infrastructure has furthermore killed producer and marketing co-operatives, which promote value addition, and also seen off publicprivate

    partnerships (PPPs), which have been dismissed under the wave of donor-

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    driven privatisation as ‘unviable parastatals’. Key infrastructure development

    challenges in Africa have also been left to the so-called ‘private sector’ and

    multilateral institutions, unlike in Asia.

The sovereign governments in Africa have over the past development

    decades been left at the mercy of short-term ‘resource envelopes’ with short

    budget-related funds suitable only for recurrent expenditure needs of a

    limited nature only.

Five decades of increasing aid in a declining Africa with shallow financial sub-

    sectors have, in contrast, seen falling amounts of aid for increasingly

    prosperous Asian economies with deepening financial sub-sectors.

Asian countries politely but firmly worked on programmes for domesticating

    aid through domestic savings and PPPs. Asian PPPs have been largely

    responsible for the region’s investment in infrastructure, which has helped

    the countries in the region to keep a firm eye on stabilising the jobs equation.

Even Africa’s consistently negative sovereignty/country ratings appear to be

    on account of massive aid inflows, and only in a limited way a result of

    governance-related issues.

Indeed, the continent’s high rate of return on investment (even after

    adjustment for country risk) increasingly suggests that the aid imperative

    needs to be revisited and reviewed, instead of being reinforced.

It is predicted that it will not be long before what is turning out to be the ‘E.

    Oppenheimer & Son Africa Growth and Development Challenge to the Blair

    Commission’ — through The Brenthurst Foundation is embraced by key

    African policy stakeholders.

Africa’s Public Policy and the Public Sector

The Brenthurst Foundation initiative is also perhaps an even greater

    challenge to Africa policymakers and stakeholders, on the grounds both of

    merit and overwhelming evidence.

Within Africa, the holdouts for the traditional aid paradigm exemplified by the

    Blair Commission Report are the powerful African aid bureaucracy. I have elsewhere referred to this powerful cadre of public officers in Africa as the

    ‘African overseas development aid (ODA) accountants’ — who are in charge

    of ‘public policy’ and have a stranglehold on African political leaders, the

    political elite, and a favoured non-tax-paying business elite.

The Africa ODA accountants (permanent secretaries, under-secretaries,

    directors of departments) are some of the wealthiest civil servants in

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    Africa today having mastered the art of managing the corridors of power

    between the politicians and the country donor groups.

The ODA accountants’ management tool for the politician is blackmail — ‘If

    you do not do it our way, the donors will cut off aid to a sensitive

    programme.’ For the donors, the management tool is no different — We are

    the only line of defence against the corrupt politicians with their predator

    businesspeople who routinely interfere with the crucial budget framework

    and its deadlines for accountability. As for the president, leave him to us.’

As regards the process of facilitating crucial ‘disbursements’, the donors

    leave the ‘performing’ civil servants to their devices — and more often than not look the other way at the extreme mismatch between civil servants’ salaries and their private investment portfolios.

The classic trademark tool of these powerful civil servants is the

    centralisation of all key donor projects in one ministry usually the Ministry of Finance and the Budget ‘for ease of control’. These civil servants

    typically have no idea about the rural countryside, apart from their home

    villages but are widely travelled and considered a local by the street

    vendors of Washington, DC.

While as well educated as his/her African counterpart, the senior Asian civil

    servant is quite domesticated, near-incorruptible and, typically, is familiar

    with the length and breadth of his or her country, but has no idea that ‘Club

    Quarters’ is a hotel near the World Bank in Washington, DC. The present

    writer came to know about this favourite haunt of African civil servants

    (those without relatives in the Washington/Maryland area) when he became

    a Presidential Advisor.

The only time these civil servants may be made to travel within their own

    country is when they must accompany the head of state on a political foray,

    otherwise most of them complete several tours of duty without ever going

    outside the capital and their home villages.

It would be interesting to have a Brenthurst Foundation team face off against

    a Blair Commission team in front of an audience of key African policy- and

    decision makers. The really interesting group to watch would be the African

    ODA accountants!

The Private Sector and Price Discovery: The Uganda Securities

    Exchange Ltd

    The story of the Uganda Securities Exchange Uganda’s small stock exchange with a market cap of US$3 billion perhaps best illustrates the stark differences in public policy and public choice between Asia and Africa.

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    After four years (198488) of a an unsuccessful media and public campaign to lobby the Government of Uganda to come up with a policy framework for a

    stock exchange for Uganda, the writer took a sabbatical at Princeton

    University to recharge very tired batteries.

Upon returning to Uganda in 1990, it took another eight years to get the USE

    launched in January 1998 a delay caused by a requirement that the law for the establishment of a regulator, the Capital Markets Authority (CMA), be

    first passed by Parliament. When the CMA eventually came into being, it was

    not a ‘sector regulator’, but is still just the regulator for the USE.

Despite a stable of products with the World Bank-financed Privatisation Unit,

    the USE could not get a product to list until 2002, when Uganda Clays Ltd

    was listed. This initial 2002 listing at Ushs4,000 per share has since

    appreciated by over 500% as at the first quarter of 2006.

For obvious reasons, the authorities preferred to dispose of public enterprises

    through ‘trade sales’ and ‘core investors’, as privatisation through the Stock

    Exchange meant an intolerable level of governance, best practice and market

    price discovery.

    The story is long but the short of it is that in 1999, the World Bank, in an official report, pronounced that a stock exchange for Uganda was not a viable

    proposition, and that we should look more to the Nairobi Stock Exchange.

Today the USE is ranked third in Africa on rate of return (81% in 200405

    and 26% annualised since 1998). Trade in government paper on the USE has

    also helped put downward pressure on the general level of interest rates

    rates that are perpetually under attack by aid inflows.

The USE and the CMA are now a reality, but unlike in Asia, these institutions

    exist in a policy vacuum. Even with proven results as the key infrastructure

    for price discovery and financial sector deepening, the USE continues to

    operate in a policy vacuum, with the incidence of public policy and public

    choice only marginally and indirectly falling on this key infrastructure

    platform. In Asia, by contrast, the effect of public policy and public choice on

    financial sector deepening infrastructure is deliberate and direct.

Asian Lesson 1: ‘Growth and Development Paradigm Imperatives for

    Africa’

The first Asian growth and development lesson for Africa is the all-important

    ‘mandatory domestic savings regime’ signal to both households and state

    institutions, as such a regime must drive the engine of a typical

    comprehensive national development framework (CNDF).

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    Typically a monetary and fiscal policy signal, it is now clear that the domestic

    savings signal has to be mandatory whether in a Third World economy, emerging market or First World economy. In Africa, this all-important and

    mandatory savings signal is muted and sometimes completely non-existent.

The CNDF is the ‘national vision’ of how and where a country wants to be

    over a given prescribed time frame in terms of the key household

    deliverables of jobs, homeownership, education, health and competitiveness.

The CNDF is also the key framework for domestic monetary and fiscal policy

    signals to domestic and foreign investors (and therefore an imperative for

    improving the growth rate) that can help engineer GDP expansion for jobs

    and promote the world-class infrastructure required for world-class

    competitiveness.

Most important as a ‘national vision’, the CNDF also captures the ‘lifetime

    hopes and aspirations of households’ for themselves and their children, typically built around the imperatives of jobs, homeownership, education and

    health.

As successfully demonstrated in Asia by country planning units, a CNDF

    allows a country to undergo a continuous process of rebranding. A country

    begins as an almost failed state plagued by ethnic strife, ideological conflicts

    and corrupt military regimes and transforms itself into a fiercely globally

    competitive nation state defined by a strong domestic cultural identity that is

    used by the leadership to bind the nation together.

With no natural resources, but through a domestic code of discipline that

    stretched the boundaries of contemporary imperatives of ‘governance’ as we

    know it today, and combined with an education- and export-led growth

    strategy, Prime Minister Lee Kwan Yew rebranded Singapore. The prime

    minister captured the hopes and aspirations of Singaporean households with

    a vision of transforming Singapore ‘from a Third World to First World

    economy in 30 years’ – the title of his famous book.

Prime Minister Mahatir Mohammed also rebranded Malaysia and captured the

    hopes and aspirations of its citizens with his Malaysia Vision 2020 and the

    Multimedia Super Corridor. This vision of a competitive Malaysia basically

    sent a signal to all Malaysians that there is nothing they could not achieve if

    they put their minds to it the famous ‘Malaysia Bole’ or ‘Malaysia Can’

    mantra.

As in Lee Kwan Yew’s Singapore, Mahathir Mohammed’s ‘Malaysia Bole’

    imperative came with a healthy dose of domestic discipline, which also went

    against conventional parameters of ‘governance’ and ‘democratic practice’.

    Conventional ‘freedoms’ were sacrificed at the altar of order and discipline for

    social and economic transformation.

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    Today as in Singapore, and thanks to the correct monetary and fiscal policy signals to citizens both Malaysian citizens and the Malaysian

    government are net savers, with 80% of exports being ‘globalised’

    manufactured goods.

It should be noted that, as with African countries, it can be safely said that at

    some point both Malaysia and Singapore experienced symptoms of failed

    states, with the confluence of internal ethnic and external ideological forces

    threatening the evolution of a national fabric.

The growth and development paradigm of the rest of the ‘Asian Tigers’ is

    similar, with slight variations determined by natural resource endowments

    and size of population. China and India lie at one extreme of both population

    size and governance structure, while Mauritius and Singapore are to be found

    at the other extreme of both criteria.

In short, this first Asian lesson for Africa could be said to be a lesson in

    deliberate national branding under a CNDF, which reflects the hopes and

    aspirations of households and ordinary people.

In contrast, the African countries and their leadership have accepted

    wholesale the ‘aid brand’ that Asian countries politely but firmly declined.

    Together with ethnic strife, failed states syndrome, and the US$1-a-day

    economy label, Africa has also accepted, unlike Asia, the false premise that

    growth and development are predominantly external functions of aid.

The African leadership, unlike the Asian leadership, has accepted the ‘sub-

    Saharan Africa growth standard’ as expressed in the Poverty Reduction

    Strategy Papers (PRSP) model, which basically condemns African countries to

    a permanent condition of poverty, which can supposedly only be alleviated

    by aid.

Professor Jeffrey Herbst of Miami University, Ohio, lists the following

    countries as superior performers and set to globalise: Botswana, Mauritius,

    South Africa, Ghana, Uganda and Seychelles. However, Professor Herbst is

    careful not to mention the benchmark for this ‘high-performing group’.

The benchmark for the Herbst Africa classification of performing and non-

    performing African countries is definitely not the ‘Asian Tiger standard’.

    Professor Herbst’s African high performers are rated against sub-Saharan

    African standards which are not much of anything and typically heavily

    influenced by cyclical aid inflows.

The list of aid-dependent countries includes those moving in the right

    direction (Tanzania, Senegal, Benin, Madagascar); the large poor performers

    (Nigeria, Democratic Republic of the Congo, Ethiopia, the Sudan); those that

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    ‘face a slow grinding down of their economy’ (Chad, Malawi, Rwanda,

    Zambia); and the collapsing states (Central African Republic, Ivory Coast).

However, perpetuated by the moribund World Bank/International Monetary

    Fund (IMF) PRSP model and now by the Blair Commission, aid cannot by any

    stretch of the imagination be said to reflect the ‘hopes and aspirations of

    Africans’. Despite various revised editions of the PRSP paradigm, the model

    continues to fail where it matters most in the delivery of the key

    requirements of jobs, homeownership, education and health, GDP expansion

    and country competitiveness.

Asian Lesson 2: ‘Sub-Saharan Africa Economics, US$1-a-day

    Households and Public–Private Partnerships’

    Asia has shown Africa and the world that the time-tested principles and fundamentals of economic theory and practice apply world-wide. Asia chose

    to globalise and adopt world-class standards.

On the other hand, Africa has accepted to be ghettoised into ‘sub-Saharan

    African standards’ of just about every social and economic indicator,

    including the defining uncompetitive trade and production paradigm of

    unfinished low-cost raw materials.

Asia politely but firmly declined the prescriptive, aid-driven PRSP model for

    its growth and development, and set a clear time frame for the globalisation

    of its domestic markets through the correct application of appropriate jobs-

    oriented monetary and fiscal policy. This policy framework led to investment

    in world-class social and economic infrastructure. Today Asian countries have

    climbed up and established not just a foothold, but a presence on Professor

    Sachs’s ‘ladder of development’.

Africa, on the other hand, having fully embraced the Word Bank/IMF-

    supported (and jobs-neutral) PRSP paradigm of aid, remains permanently at

    the foot of Sachs’s ladder of development, hoping that the Blair Commission

    initiative will finally grant the continent, at the very least, a toehold on the

    ladder of development.

Together with the correct application of monetary and fiscal policy signals to

    determine both the level and type of investment in their economies, Asian countries, unlike their African counterparts, have forcefully integrated

    themselves into the world economy.

This, the second lesson group for Africa from Asia, suggests that there is no

    such thing as a special ‘ladder of development’ for Africa — which is where

    the advocates for more aid appear to be taking us.

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    There is also no such thing as ‘sub-Saharan Africa economics’ for the millions

    of so-called ‘dollar-a-day’ households, where the universal notion of domestic savings for jobs, homeownership, education and health is supposedly

    inapplicable.

What matters is the correct application of monetary and fiscal policy signals

    to the domestic and foreign investors and this applies whether you are in

    the First World, the Third World or an emerging market. Accordingly, ‘poor

    households’, as in Hernando de Soto’s ‘informal sector’, can be brought into

    the formal economy with appropriate monetary and fiscal policy signals.

And in turn, the lesson from Asia here is that world-class infrastructure can

    only be developed by publicprivate partnerships but most African

    countries have dismantled their PPPs under privatisation programmes!

Accordingly, the Asia lesson here is that the importance of world-class

    infrastructure to drag the dollar-a-day households into an educated and

    competitive workforce cannot be underestimated.

    Asian Lesson 3: ‘A Cash-Flow Regime (Monetary and Fiscal Policy) for African Countries

Asian countries realised early on that the basis of country competitiveness is

    transaction costs or the cost of doing business. Financial sector deepening for country competitiveness became the basis of economic strategies and

    policies.

African economies, on the other hand, came under the influence of the early

    versions of ‘pricing with an aid premium’ under the operating PRSP regime, and opted for the management of even their national budgets on a ‘cash

    basis’. As a result, African countries to date continue to take a short position

    on their own economies, putting upward pressure on the cost of transactions

    in the economy. Unlike in Asia, country competitiveness was never on the

    agenda in Africa, only the alleviation of poverty.

Accordingly, the third Asian lesson for Africa is that the current PRSP

    prescription for the cash management of the budget process must be halted

    in favour of a leveraged process governed by a benchmark bond of

    significant tenor.

Current moribund medium-term competitive strategies, and the operating

    medium-term expenditure strategies based on the donor resource envelope

    must also be urgently reviewed and benchmarked on a long bond for the

    promotion of instruments in the economy.

The resulting cash-flow regime of cash-based transactions in the economy

    (as opposed to the PRSP’s lump-sum regime) will promote the much-needed

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    Asia-type leveraging of resources in the economy. This leveraging promotes

    economic resilience to cyclical shocks, as demonstrated in Asia during the

    currency crisis of the 1980s.

African economies, unlike their Asian counterparts, have therefore contracted

    an inherent inability to resists cyclical shocks and are highly exposed to

    speculative investments at the short end.

Asian Lesson 4: ‘Globalisation of the Africa Value Chain for Exports’

The fourth lesson is that so long as there are politicians, there will be trade

    restrictions. But while trade barriers are an important consideration in trade,

    what matters even more is the level of the value chain at which an economy

    is producing.

In this fourth lesson, Asia has for practical purposes ignored trade

    restrictions and worked on areas of other benchmarks of competitiveness

    developing factory floors that can be quickly reconfigured or adapted for

    other products with better tariff or non-tariff advantages in target markets.

Accordingly, it is more important for Africa that the goods produced in the

    African economy are globalised and therefore competitive in price and world

    class in quality where ‘world class’ is defined as a retail-store-ready

    product for the North American (through the African Growth and Opportunity

    Act - AGOA) and EU (Everything But Arms EBA initiative) markets, Japan

    and, increasingly, Arab/Middle East ‘for sale’ shelf display.

The point here for Africa is that the ‘raw materials producer paradigm’ cannot

    and does not engineer GDP expansion. The paradigm cannot optimally create

    jobs, which in turn means fewer pay cheques in the economy, which leads to

    the familiar low domestic savings ratio as a percentage of GDP, and little

    domestic direct investment or DDI for the necessary domesticating of FDI.

Asian Lesson 5: ‘Domesticating Foreign Direct Investment (FDI) with

    Domestic Direct Investment (DDI)’

    In his book, The End of Poverty, Jeffrey Sachs lists six categories of capital that he considers the extremely poor lack: human capital, business capital,

    infrastructure capital, natural capital, public and institutional capital, and

    knowledge capital.

Like those in Asia, African countries have all combinations of Professor

    Sachs’s list. It follows that Africa is poor for other reasons, and not because

    it lacks the ‘minimum amount of capital’ to get a ‘foothold’ on the ladder of

    development.

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